Are you perplexed as to why some companies are listed on the stock exchange while others are not? That is when the IPO comes into action. You may be wondering what an IPO is, how it works, and whether it is a good idea to invest in an IPO.
Read the blog to find out more.
So, what is an IPO?
The term “IPO” stands for “Initial Public Offering.” The process by which a private company decides to go public by selling its shares to raise capital is known as an “Initial Public Offer.”
Why does a company decide to go public?
There are numerous reasons a company decides to go public; let’s review some of them individually.
1. The primary reason for going public is to raise capital. The funds raised can be used to expand and improve the business, work on infrastructure, repay loans, and so on.
2. Going public opens the door to stock options and other programs such as compensation.
3. Being listed on the stock exchange indicates that the company has succeeded by being present there, which creates brand identity.
4. There is room for mergers and acquisitions because stocks can be issued as part of the deal.
Types of IPO pricing
There are two types of pricing in initial public offerings.
• Fixed-price offer
As the name implies, the price of the shares is fixed, and investors need to initially purchase the shares at the same price as decided by the company.
• Book building offer
The method in which the underwriters determine the share price that can be sold in an initial public offering is known as a “book-building offering.” The entire price discovery process necessitates bids from various institutional investors, fund managers, etc.
Benefits of investing in an IPO
Investing in the stock market is a popular way to make money. Investors may benefit in the short and long term by investing in IPOs. Let’s take a look at the advantages below.
Once the shares are listed on the stock exchange; investors are free to sell them in the open market since the company’s shares can be bought and sold at any time, making them a highly liquid asset.
- Listing gains
One of the benefits of investing in an IPO is the opportunity to profit on the day of listing. The offer price for a company’s stock is stated in the prospectus. An investor can request a certain number of shares at a particular cost. The listing gain occurs when the share price on a listing day is higher than the price paid when applying for the IPO.
- Become shareholders
When you invest in an IPO, you become a shareholder of the company, which grants you voting rights at the company’s annual meeting.
- Purchase cheap, earn big
Investing in an IPO is the cheapest way to buy a company’s shares because the company may offer the shares at a discounted rate. If you miss the IPO window, it may be difficult to invest in that promising company because the stock price may skyrocket in the secondary market after listing.
Should you invest in an Initial Public Offering (IPO)?
Investors should only invest after thoroughly researching the company, whether it is its financial balance sheet, red hearing prospects, or plans.
Because IPO investments are equity investments, they are highly volatile. IPO investments are dealings in securities, which are subject to market risks. Investors can profit and lose money if the company, sector, country, or world experiences a few ups and downs.
How do I go about applying or invest in an IPO?
It is simple to apply for an IPO.
• You only need your DP information
Choose the company IPO in which you want to invest.
Make the payment via UPI.
Note: You will receive a mandate approval message; you must agree to the mandate in order to block the funds.
Investors can check the status of your allotment on the stock exchange and RTA websites.
Investors can sell the shares only after they are listed in the secondary market.
New changes in IPO w.e.f. September 1st, 2022
1. The UPI mandate will expire at 5:00 pm on the last day.
2. The T+1 session shall cease to exist, and all modifications shall be done up to 5 pm on the last day.
3. Only blocked bids will be shown on the website.
4. Investors who actually want to buy the company’s stock can participate in the IPO. Some institutional and wealthy investors (HNIs) compete to increase the IPO subscription. SEBI’s new rule prohibits bidding to increase subscription data.
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